Flip through the latest issue of Gulf Weekly.
Bahrain calls itself the region's most mature financial centre. The title also carries with it a number of tasks such as swift damage control when banks take a hit and steps to insulate the banking sector from over-exposure to risk areas such as the capital market, mortgage financing and consumer lending.
Therefore, as soon as two Bahrain banks, Arab Banking Corporation (ABC) and Bank of Bahrain and Kuwait, reported that the US subprime crisis had hit their profits, the Central Bank of Bahrain (CBB) started to think in terms of new rules to limit banks' exposure to the real estate market.
Not a knee-jerk reaction by any means. The kingdom, which has perhaps the best regulatory environment in the Middle East, needs to tighten up the strings and be vigilant "because it is in boom times that mistakes are made and guards are let down."
As for the banks affected, ABC saw its annual profit fall from $202 million in 2006 to $125 million this year.
BBK had to make a BD23.2 milion provision to cover losses due to the US subprime crisis. The profit would have been BD46.7 million but for the impact of the writedown which saw profit for the year down 8.4 per cent over 2006 at BD30 million.
Currently in the UAE, only the Abu Dhabi Commercial Bank has reported any subprime losses, writing down $19 million in the third quarter.
This may not continue for long. The Middle East Economic Digest (Meed) reported last month, citing unidentified bankers that banks in the Middle East will announce losses from exposure to the subprime mortgage crisis when they report fourth-quarter earnings.
If the Gulf financial institutions have little exposure to the subprime crisis, then what is holding back Arab Islamic bond sales?
Greed and fear linked to the subprime debt crisis are holding back Arab Islamic bond sales, even though issuers have little to do with the bad loans that triggered the crisis, says Ahmed Abbas, chief executive of Bahrain's Liquidity Management Centre (LMC).
Spreads for more than $15 billion of Islamic bonds on the HSBC-DIFX GCC Sukuk Index have more than doubled since June to 217 basis points on January 23.
Gulf borrowers are increasingly turning to syndicated loans for fundraising and turning away from the once red-hot sukuk market because of widening spreads and the fear that a sale of the high-profile instrument could fail, Abbas says.
In December, the Dubai Electricity and Water Authority (Dewa) pulled the sale of conventional and Islamic bonds worth as much as $2.5 billion from the market as borrowing costs rocketed on the fall-out from subprime loans. The firm has since sought to raise an Islamic loan worth at least $1 billion.
It was when securitisations in Arab countries were just getting off the ground that the subprime crisis struck. About $2.5 billion of securities backed by mortgages and other assets securities had been sold by July, the Dubai International Financial Centre estimates.
Among them was a $350 million bond sold in 2005 by Emirates National Securitisation Corp in a government-sponsored deal that was intended to kickstart sales, so deep was the belief that the region needed to develop a market for asset-backed loans.
Securitisations allow investors to buy bonds that are directly tied to mortgages, auto loans or other income-producing assets. The loans move off the balance sheets of banks, freeing them to lend more and drive growth in mortgage markets, which in turn helps meet demand for housing.
Saudi Arabia, the largest Arab economy, is planning a mortgage law to help fund a market for new homes that according to Dubai-based mortgage firm Tamweel needs 200,000 units a year.
The Emirates National Securitisation bonds were backed by a cash deposit, which investors could turn to in the event of default on the home loans they had financed. That triggered a race for the Gulf's first "real" securitisation.
The securitisation market had the potential to be worth $250 billion by 2010, Nasser Al Saidi, chief economist of the Dubai International Financial Centre, notes.
The market still has the potential, but will probably take longer to live up to it.
